TOPIC: Percentage Rent Lease - help needed

I’m a landlord to a small 2 screen theater development. The theater owner is struggling with making rent. I’ve considered lowering rent but it would compromise the small return we’re targeting. So, I’m looking for a win/win solution. I’ve learned a little about percentage rent leases. At a high level, the idea is appealing, as it has some win/win aspects to it. I’ve approached the theater owner with the idea and he was excited learn more.

With that I have some initial questions:
Has anyone had a positive experience with percentage rent leases?
Does anyone have any examples on how to structure a percentage rent lease with theater?
Also, are there any lessons learned from them before we design and implement one?

First you need to know that the theatre operator already gives a percentage of the box office receipts to the film companies. Usually around 55%. So your lease percentage would have to cover the overall gross. But you need to discuss with the theatre operator what he believes he can afford. With this type of lease your share will rise and fall with the theatre's gross. If the operator is having trouble making rent I would suggest the operator take a good look at why and seek some advise. It's my opinion that an operator who can't make rent is not running the theatre at it's full potential. Perhaps he's booking the wrong pictures or not promoting the theatre and it's programs. I believe any theatre when properly run will succeed. It all depends on how it's being run of course.

I could not disagree with you more. A properly run theater may still not succeed. A theater with free rent may still not succeed. That is why theaters get demolished or rehabbed to some other use.

Cons:
You have to trust whatever numbers they (the tenant) gives you are accurate. There can be wide swings in revenue from month to month. A seasonal 1st run can see grosses fluctuate as much 3-4x the low.

IMHO, stick with a flat rent. It may be time to take a hard look at the theater to see if can make it. What is the operating history of the theater? What other theaters are in the area? Any of them have 3d? Twins can be tough to operate. Chance for operating a twin successfully increase greatly if there is no competition within 20-30 miles.

Many small, independent theatres fail because they either don't want to or can't think outside the "first run, second run" box and let their booking policy be dictated by what the Hollywood distributors are promoting. For the English speaking world there are films being made in Canada, England, Australia, New Zeland, Independent American and even some Bollywood films. One can be different and with good promotion succeed even if they are located down the block from one of the corporate big-boys multiplexes.

Good points all and I think I agree with each perspective. To keep the discussion going…here’s a little more insight into the situation.

Known…the theater is under two years old in a smaller town with good growth potential - owner is a new the movie theater business.
Assumption…I do believe there is some room for improving the theater’s operation, per my knowledge of how things are done today.
Fear….if he fails, I’m worried, I might not be able to rent for the same rent we’re getting today (3 years ago…was the last chance for decent rents…which justified building a high quality development)
Faith…It can be turned into a gold mine with a little time, creative approach, and better management!!
Desire…I want to help…and have been offering assistance…but do not want to become enmeshed. Don’t want to become an enabler.

More thoughts?

BTW…I’ve been thinking about posting for some time now…and finally felt comfortable after spending some time lurking on the forums. Ya’ll have a great community here!

Smtownthrll, you've made some good observations about the situation you find yourself in. Personally, I suspect you'll need to do some more research before deciding whether this can be fixed.

I imagine the theatre is at the top of its cost curve... nothing really having been paid off yet. That can lead to sleepless nights on both sides. However, I'd ask what business prep you, or your tenant made before starting this project in the first place. I ask because you seem to indicate you're new to this market, as is the tenant.

I see new theatres in competitive markets open all the time, with good initial results. People will tend to flock to the new place, to check it out. There should have been a decent "honeymoon" period for your theatre.

On the other hand, a new tenant might not have booked the best films for your area, might not have scheduled showtimes well, promoted well, stocked and priced concessions in the best way for the market... all things that come with experience. That's hard to say from your description, but certainly possible.

While the situation might be fixable, especially if the tenant is making really bad choices, or you're expecting unreasonably high rents for a theatre, it's also possible that this might have just been a bad choice for the market or location you're in. Respectfully, I would also disagree with Robert's assertion that any theatre can be made profitable with proper operation. In many cases, it's just not worth banging your head against the wall for the couple of bucks it might bring you.

The earlier-posed question, why only two screens, is a valid one... especially if your theatre is booking first-run pictures. Although some here have even made single screen theatres work, in general theres just not enough turnover or variety offered with only two screens to make a theatre economy work well. There are exceptions, and I know of one twin in a nearby small town that seems to be doing OK, but it's far from a sure thing.

The point here, is that more needs to be known about what's going on in your case. Going to a percentage lease is risky, and only prolongs the pain of a poorly performing business, in my opinion. I see those kinds of situations where a landlord can make more money as a business succeeds, and is willing to participate in its cost of operations... possibly by taking on more of the costs of maintaining the infrastructure, covering cam costs and possibly any property-wide advertising contracts.

The population pull is around 10,000. Existing building limited the size to 2 theaters. Other theater within 10miles (larger nationwide chain).

Theater owner does (in my opinion) have a good eye for movies. From what I understand, he's not always able to get movies scheduled in far enough advance, and might even get a back seat to other similar sized theaters on film choice, which has made his sales/promotional efforts suffer. He's also found the theater has a about 2 week threshold for movies. Going three weeks...tends to result in an empty house.

How things can be run better - Not trying to avoid answering questions about how things are run, but I'd feel better if the owner is ok with me sharing some details of situation, knowing this is a public forum. He's the type open to feedback....I'll check with him and get back with you there.

Back the percentage lease aspect. I understand it's risky and also understand that depending the run of the film the percentage take can change. I think the risk, to some point, can be calculated, but the risk of lease default is more scary to me.

Hello,
I am the rookie theater operator of said 2 screen small town theater. It could be run better I'm sure but i think it's run OK and improving. Rent is high in my opinion, higher than anticipated when doing the biz plan, not only sq ft wise but size of space based on 3000 sq ft and the lease said 3500 plus when all was built out plus a 20% increase in rent when i backed out of being part landlord. $21.60 a ft for every foot including the foyer and bathrooms I share with the cafe next door not counting triple net. That's a tough nut to crack in this economy and in my market. can't find anyone around me paying that price. The rent is based on their investment, not the location, type of business or obvious downturn in the economy.

Now, the landlords are good people, working with me, not charging interest on back rent but it's still piling up. I can't sell to anyone who knows the theater business without a renegotiation of the lease. I haven't been paid since we started this and I'm out of money now, had a heart attack too so I'm only working 65 hrs a week right now. And I love it except I can't get it to pencil out.

It's a really nice space and growing, just had a record weekend with Harry Potter and Tangled playing, also wrote record checks to Warner and Disney. I have a video rental in the lobby but am pulling it out after biz dropped 70% and stayed down when I moved into the new location. This space is not as good for retail as the old location and the rent is higher. The landlords wouldn't let me have a Marquee for the first 14 months in business, but now have one (at their expense and I thank them very much) since August. Am just noticing the value of that addition.

The economy is tough around here too. Sept/Oct was worse this year from the 1st year in operation, Nov is showing much better. I think the movies available has something to do with it.

I also put in over $350,000 in lease holder improvements and equipment, basiclly building the old firehouse into the theater, they bought the building, major improvements, sprinkler system, exterior stuff, heating/cooling etc and I built the interior, electrical and all theater needs. It was not a turn key set up by any means. And it went over budget but am proud of what we built along with the landlords who are very community oriented like me.

So, I think the rent is too high for the type of business. I could be wrong/ignorant, would like to know what I'm doing wrong. What is a good percentage of tickets sold per seats available (or does that matter?). I've been doing 30%+ concessions to ticket income, I think that's pretty good. We are cheaper than the next theater, a 10 plex 10 miles away (I believe they are appraised by the county as $13 a ft rent). Maybe I should raise prices.

Any input or questions to help discern the problems please send it my way. i am open to % rent but the % to the studios is already getting the lions share of gross income.
Thanks and happy holidays,
Craig

Some guidelines from what I can tell in normal/average situations: A theater's rent should fall in the range of 50% of what high traffic good retail property will get. so $21 a foot would mean that good retail would have to pay $42 a foot. What does good retail get for rent?

My suggestion go with the % rent: agree that the following gets paid first: 1) film rental, 2) utilities, 3) concession inventory, 4) wages including a salary for you Craig that gets you a min. decent standard of living including health coverage, 5) then rent based on a value of 67% of what good retail space in the area recieves). Since the landlord is taking a greater risk they should be able to get more than what would be customary (vs the 50%). 67% would be a decent premium.

As an operator of a single screen theater I have a percentage based rent structure with my landlord. We have entered into this agreement for a 1 year lease with a percentage (15%) and a $2500 cap. We are second run and classic. We also "4 wall" the theater to various events. This system is working out very satisfactory for both us and our landlord. Remember it is better for the property owner to make some money off of an occupied building than to get nothing off of an abandoned property. Just my 2 cents worth.

"4 walling" is basically renting the theater out to promoters for concerts, conferences, weddings, classes (these work well for film history classes), private screenings, film festivals, award ceremonies and just about anything else that will generate a steady income. My goal is to stay open and make a few $$. Let's face it, none of us will ever get rich and most of us should be locked up or committed but, God I love this business!!!